Friday, November 26, 2010

Will the SEC Cause a Stock Market Crash?

Aside from the absurdity of insider trading as a crime, one has to wonder about a government that  suddenly decides to aggressively expand the definition of insider trading in a way that can result in charges coming pretty much against the entire hedge fund industry---at a time when the economy is just starting to come out of the worst downturn since the Great Depression.

Yes, big time arrests are coming, many surrounding "expert networks", which as I have already explained are only one step away from being simply newspapers. (Indeed, Reuters and Bloomberg run expert networks!)

We know major arrests are coming because government operators have leaked the inside information about the coming insider trading arrests. You see, it is okay for the government to illegally leak information to the mainstream media to spin their story and poison jury pools about Wall Street insider dealing. These insider leaks will never be prosecuteds or investigated. But it is much more evil and dangerous. It juices government access to reporters who then report only the government's side. It truly corrupts society, when you have prosecutors and their agents break the law in this fashion. Yet. this is somehow okay with these characters. Hypocrisy, thy name is more than Eliot Spitzer.

We are told day after day that consumers and investors have lost faith in the economy. Yet, the government via the SEC/DOJ has decided to go on a publicity blitz and create total mayhem in the hedge fund industry. This, of course, will likely spook investors, as more details are revealed, along with accompanying perp walks shown on television. Let me ask you? If you are a wealthy individual with money in a hedge fund and you see employees of the manager of your hedge fund marched into court handcuffed and accompanied by FBI agents, how long is it going to take you to decide to pull your money from that hedge fund?

Indeed, the drain has started before the SEC and DOJ have even seriously gotten into their pyrotechnic show. The hedge fund, FrontPoint, with $7 billion under management, and which as become an early focus of the grand SEC/DFO show, is reporting that investors have requested to withdraw $3 billion.

FT reports on the situation this way:

“It is difficult for an entity to keep going because at a certain point the business ceases to be viable whether it has crossed the line or not,” said the head of one firm which invests tens of billions of dollars in hedge funds on behalf of clients.

“The regulators effectively put them out of business.”
What exactly was the great evil conducted by FrontPoint that is causing this crisis for the fund? The fund actually tried to protect its investors by seeking out information about what was going on in one the companies they invest in. A French doctor, who has already been charged, told FrontPoint about some poor clinical trial data. FrontPoint sold the stock. Imagine that, in the eyes of the SEC/DOJ, it is a crime to actually wake up an hour earlier than everyone else to find out what is actually going on with the investments  that you put your clients into.

Mind you, this is only the warm up show. When the SEC/DOJ really launches its Off-Broadway show, talking heads will be discussing the evils of Wall Street and insider trading, on every channel of network and cable television. It will spook investors, big and small, from Zurich, Switzerland to Piedras Blancas, California. I'm thinking the liquidations, if the SEC/DOJ show is as big as the hype, and it is likely to be so, could exceed a trillion dollars.

Now some of these funds have lock-up provisions which will make it difficult for investors to immediately withdraw funds and the money is not going to disappear, it will be placed in other investments, but the rip tides in the market for some individual stocks that will be sold by liquidating hedge funds are going to be huge. It will add to uncertainty about the stock market and create a greater demand to just hold cash---just as this demand was appearing to unthaw a bit.

Will this cause a full-fledged stock market crash? It could come mighty close. Bernanke is printing a lot of money right now, so it should keep things afloat, but the SEC/DOJ operation is equivalent to the launch of the attack on it Iraq. It is not well thought out. The full ramifications are going to be a lot messier than anyone in government understands.

For the savvy, there will be a lot of money to be made watching the bobbing stocks. For the SEC/DOJ, it's likely to end up like a grand show where lighting from the ceiling comes crashing down in the middle of  the performance. Why has the Obama Administration decided to bring this circus act to town? It is not exactly clear, but when you hear the words, and you will, "This will fundamentally change the hedge fund industry," think bobbing stocks, rip tides and the egomaniac prosecutors and regulators behind this madness.


  1. The SECs actions might cause a stock market crash, but I am more concerned about sovereign crises.

    Ireland’s Prime Minister Brian Cowen, in accepting seigniorage aid from the UK, the IMF, and the EU, waived Ireland’s national sovereignty. The aid package melds the UK, the IMF, and the EU into a new sovereign Supra Government with David Cameron, Dominique Strauss Kahn and Olli Rehn as Ireland’s Sovereigns and Seigniors, the latter is an Old English word meaning top dog banker who takes a cut.

    The sovereign crisis presented by IMF Chief Dominique Strauss-Kahn, has not be abated, it is only held in abeyance. Philip Aldrick, Economics Editor of The Telegraph in November 19, 2010 article IMF Chief Urges Leaders To Cede More Sovereignty To EU, writes European nations need to cede more of their sovereignty and hand greater powers to the centre to avoid future sovereign crises, the head of the International Monetary Fund has said.

    Open Europe in November 25, 2010 Press Summary reports: “Meanwhile, the Irish government released a new budget which sets out plans to cut public spending by 20%. The plan aims to reduce public spending by €10bn and to raise an extra €5bn in taxes by 2014, reports the Irish Times. Welfare spending will be hardest hit, pensions will lose tax exemption, university fees will rise and taxation will increase, leading to up to 25,000 public sector job cuts.

    The Irish Department of Finance confirmed that the IMF and the European Commission will have the authority to recommend changes or alterations to the four-year plan during negotiations.

    Noah Barkin in Reuters’s Breaking Views writes: “Unthinkable only a few weeks ago, a small but growing number of experts now believe some version of this nightmare scenario could become a reality for the eurozone.”

    One nightmare scenario is the risk of Götterdämmerung, that is a world-wide investment flame-out, and resulting stroke to the institution of banking, lending, finance, commerce and trade.

    Given that risk, I ask in blog article: Might A Sovereign And A Seignior Arise Out Of Europe’s Sovereign Crisis To Secure The Euro The Euro As A Currency And Provide Stability To All Nations Involved?

  2. "absurdity of insider trading as a crime"?

    You used to be cool. There's nothing inherently immoral about knowing something someone else doesn't. But to set up a market with the pretense of a level playing field andn turning a blind eye while the powerful and well-connected fleece the little guy certainly is.

    It will also result in the little guy getting out of the market. Our markets have very little credibility right now, and that's a problem you're not appreciating. I don't play stupid casino games that are rigged towards the house, and for the same reason I won't be swimming with the hifreq, book-trading sharks either.

  3. "This will fundamentally change the hedge fun industry"

    Ha! What a freudian slip.

  4. Any sign that certain 'expert networks' are being ignored/protected in all of this?

    Those associated with The Carlyle Group Boys for example.

    And always keep in mind: WWMT!

    What would Murray Think!

  5. Hedge funds are nothing more than legalized casinos, who cares if they all go belly up. We will all be better off without them.